The Collective Investment Fund Regime in the DIFC Unlocking the Middle East

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1 The Collective Investment Fund Regime in the DIFC Unlocking the Middle East Royal College of Physicians, Dublin Simon Gray 23 rd April 2009

2 Topics Key considerations Investment vehicles Operating a CIF in the DIFC Regulation of Funds Public and Private Funds Listing of Funds Marketing of Foreign Funds Specialist Funds Recent developments 2 Page 2

3 Key Considerations in Developing the Funds Regime Develop the DIFC as a major internationally recognised Funds centre; Ensure compliance with IOSCO principles for CIS to permit pass-porting to and from DIFC; Ensure flexibility: permit a variety of recognised investment vehicles; Limit product regulation only to where appropriate; Permit appropriate delegation and outsourcing; Ensure marketing of Foreign Funds in a manner competitive with international practice; and Page 3 Facilitate licensing and registration of participants in an efficient manner. 3

4 Legislation which Facilitates the Funds Regime The Collective Investment Law 2006 Collective Investment Rules Companies Law 2004 Investment Companies Regulations Limited Partnership Law 2006 Limited Partnership Regulations The Investment Trust Law 2006 Regulatory Law 2004 Regulatory Law Amendment Law 2006 The DFSA Rulebook Amendments to COB Module, OSR and other Modules 4 Page 4

5 Definition of a Collective Investment Fund Arrangements with respect to property including money where: purpose or effect is to enable participants to receive profits or income; contributions of unit holders and profits or income are pooled; participants do not have day-to-day control over management, property is managed as a whole by or on behalf of Operator of the Fund. Page 5 Rules in CIR Module exclude certain arrangements from being Funds i.e. PSIA s. 5

6 3 types of Investment Vehicles: Investment Vehicles Investment Company: Incorporated in the DIFC; Requires Memorandum and Articles of Association; Composed of Directors and Shareholders; The Operator is a Corporate Director authorised by the DFSA. Investment Trust: Incorporated in the DIFC; Requires a written Trust Deed; Both Operator and Trustee are responsible for maintaining the written Trust Deed; Trustee holds the Fund Property in Trust; Trustee is responsible for maintaining the register of Unitholders. Investment Partnership: Incorporated in the DIFC; Requires Partnership Deed or Agreement; Composed of General Partner and Limited Partners; The Operator is a General Partner authorised by the DFSA. 6 Page 6

7 Funds in the DIFC International Standards for Fund regulation Domestic and Foreign Funds Variety of Investment Vehicle structures Operators and Trustees must be in the DIFC Disclosure Corporate Governance Valuations Service providers. 7 Page 7

8 Operating a Collective Investment Fund in the DIFC To Operate a CIF is to be establishing, operating or winding up a CIF in the DIFC; A Domestic Fund is one which is established or incorporated in the DIFC; All Domestic Funds must have an Operator which is an Authorised Firm; The Operator must have the following Authorisations on its licence: Operating a Collective Investment Fund 8 Page 8

9 Regulation of Funds Domestic Funds are Funds (both Public and Private) established in the DIFC; the Operation of which is regulated under the CIF regime; Marketing of Units of which is regulated under the CIF regime. Foreign Funds are not Funds established in the DIFC; Operation of which is not regulated by the DFSA; Marketing of Units of which is regulated. 9 Page 9

10 Key Regulatory Features Operator and Trustees must be Authorised Public Funds must be registered; Private Funds only notified Annual and Interim reporting requirements Valuation of Fund Appointment of Eligible Custodian Appointment of Registered Auditor. 10 Page 10

11 Public Funds and Private Funds Public Funds: Units are offered by way of a public offering; There are no limits on the number of Unitholders; Requires a long form Prospectus; Requires oversight arrangements to be implemented and maintained; May be listed on an Authorised Market Institution; Requires registration with the DFSA; and Page 11 Subject to DFSA specific restrictions on investments and borrowing powers. For a Public Fund (excluding a Property Funds) borrowing must not exceed 20% of NAV. 11

12 Public Funds and Private Funds Cont. Private Funds: Units may only be offered by way of a private placement; Participation to a Private Fund is limited to 100 unitholders; Requires less detailed disclosure in the Short Form Prospectus; No requirement on Private Funds to implement and maintain oversight arrangements; May NOT be listed on an Authorised Market Institution; Merely requires notification to the DFSA; and Permitted by its Constitution and Rules to borrow money in excess of 200% of the NAV provided full details of the manner in which risk posed will be managed. 12 Page 12

13 Marketing of Foreign Funds Units of Foreign Funds can be marketed only: by an Authorised Firm; and where the Foreign Fund is either: a Designated Fund from a Recognised Jurisdiction (COB 6.9.4); or a Non Designated Fund that meets alternative eligibility criteria based on adequate comparable regulation of the custodian and investment manager of the Fund (COB 6.9.5); or the investment grade rating of the Fund (COB 6.9.5). Recognised Jurisdictions List : COB Periodic Reporting. 13 Page 13

14 Specialist Funds The DFSA has prescribed specific additional provisions to match the special features of the following funds: Islamic Funds; Fund of Funds; Private Equity Funds; Property Funds (including REITS); Feeder Funds; and Hedge Funds. 14 Page 14

15 Specialist Funds - Domestic Islamic Funds Page 15 Operator of an Islamic Fund must establish and maintain Systems and Controls which ensure that the management and fund are Shari a Compliant; The Operator must ensure that both Constitution and Prospectus are approved by the fund s Shari ah Supervisory Board (SSB); The Operator must implement and maintain an Islamic financial Business Policy and procedures manual for the fund; Shari a Supervisory Board has at least 3 members; and The governing body of the fund is responsible for appointing, dismissing and changing any of the members of the Shari a Supervisory Board. 15

16 Specialist Funds - Domestic Hedge Funds Page 16 A DIFC Hedge Fund can invest in a number of Hedge Funds or sub-funds of one or more Hedge Funds; The Operator is responsible for making sure that the risks associated with Hedge Funds are adequately managed; The Operator is responsible that there is adequate segregation of duties in the net asset value process; The Operator should observe best practice standards and guidance issued by both the DFSA and by leading international trade bodies in relation to Hedge Funds; An Operator may grant to a prime broker authority to combine the assets of the Fund with any other assets providing certain conditions are met i.e. Limited to Private Funds; and DFSA Hedge Fund Code of Practice (15 Jan 2008). 16

17 Specialist Funds - Domestic Property Funds Page 17 Must be a closed-ended legal structure for investment vehicles; If the fund is a Public Fund, it must be: An Investment Company or Investment Trust; Listed on an Authorised Market Institution; The property must be valued by an independent valuer before acquisition and disposal; An investment committee of 3 experts must be voted on by the unitholders prior to the establishment of the fund unless it is an Investment trust; Transactions with affected Persons; Use of Special Purpose Vehicles; Joint Ownership Arrangements; and Borrowing up to 80% for a Public and 100% for a Private Property Fund. 17

18 Specialist Funds - Domestic Property Funds - REITS DIFC REITS general features are: be a Public Fund; be an Investment Company or Investment Trust; be closed ended, listed and traded; distribute at least 80% of annual income; limit borrowing to 70% net asset value; and 30% cap on investments in property under development. 18 Page 18

19 Prospectus Offers OSR Requirements: Filing a Prospectus DFSA has 3 days to file (generally) but does not review/approve- OSR Appointment of an Underwriter - OSR Becomes Reporting entity on filing (unless exemption applies)- OSR Appointment of a Sponsor - OSR Disclosure of a sell down by Governing Body - OSR Prospectus- see also Markets Law- Article Page 19

20 Prospectus Requirements Prospectus Article 15(2) of the Markets Law 2004: all information as investors would reasonably require for the purpose of making an informed assessment of: (a) the assets and liabilities, financial positions, profits and losses and prospect of the offeror or issuer or both; and (b) the nature of the securities and the rights attached to those securities. Also obligation to comply with OSR. 20 Page 20

21 Prospectus Prescription of content requirements in Appendix 1 of OSR Valid for 6 months Structure: - Registration Statement Information about the issuer - Issue Note Information about the security Incorporation by reference Up to date and accurate - Supplementary Prospectus Responsibility for Prospectus: Person who files Directors of the Issuer Expert Statements Exceptions of Liability Civil compensation under Article 51 Markets Law. 21 Page 21

22 OSR Prospectus - Not For All Securities 22 Page 22

23 Offers from DIFC to Another Jurisdiction Markets Law Article 13 Must be made in accordance with OSR Person making the offer is in DIFC Directed at or received by person outside DIFC Offer is capable of acceptance OSR 2.7 Must advise DFSA of nature and jurisdiction within 5 business days Comply with obligations of other jurisdiction in relation to offer Disclaimer that not reviewed or approved by DFSA OSR requirements do not apply if offer would be personal exempt in DIFC. 23 Page 23

24 Reporting Entities- Obligations - OSR Ch 8 & Appendices Reporting entities- all Prospectus Offerors (including Funds) in the DIFC - and/or those who have securities listed on DIFX Disclosure obligations: Price Sensitive Information Changes to Governing Body Changes to Business Connected Persons Transaction Financial Information Matters relating to Capital Security holders Decisions Insolvency Events Corporate Governance Rules. 24 Page 24

25 OSR and Listed Securities Markets Law Article 17- DFSA may object to an admission of securities to an official list (of AMI), impose conditions or restrictions on admission OSR at least 5 business days prior to admission of securities to official list notice and information to be provided to DFSA OSR grounds for decision and rights to make representation OSR directions to delist or suspend. 25 Page 25

26 Process For Offering Through* (in or from) the DIFC Offer Exempt Offer No prospectus filing required Statement of nature & rights of securities Maintain register of offerees Prospectus File prospectus with DFSA before making offer Publish prospectus Filed 3 days prior to offer (merits not considered) DIFC into another jurisdiction No prospectus filing required Advise DFSA of nature of offer & jurisdiction Comply with rules of other jurisdiction. * Clarified in Cabinet Resolution No. (28) of Concerning Financial Free Zones 26 Page 26

27 Exempt Offers Basis for exemption - OSR (one of): i) Commercial paper, certificates of deposit or bills of exchange; ii) Made to no more than 50 offerees in DIFC in 12 months*; iii) Total consideration payable is less than USD1m*; or iv) Debentures with minimum consideration of USD50k. *constitutes Personal Exempt Offer ( may only be accepted by person to whom made) Other exemptions: i) Employee share plans; ii) Intra-group offers of securities for structuring purposes; and iii) Issue of securities resulting from a conversion. 27 Page 27

28 Hedge Fund Code of Practice Addresses operational and conduct of business issues for HFs; Is principles-based (flexibility); Does not address financial stability; Does not impose fixed obligations; Is in line with both the HFWG and AIMA work; and 9 principles. 28 Page 28

29 Hedge Fund Code of Practice Cont. Have or have access to appropriate skills and resources Implement a robust and flexible investment process Systems and controls to mitigate trading-related risks Adequate back office systems and controls Identify and manage portfolio risks Integrity, accuracy and timeliness of valuation.. Processes Conflicts and fair treatment - e.g. side letters Systems and controls re- market sensitive information Fund of Funds. 29 Page 29

30 Recent Developments Public Funds - open to Retail Clients Private Funds - only to Professional Clients Fund Administration - Restriction removed Delegation of Fund Administration - only to a firm in Zone 1 or Rec Jurisdiction if a Public Fund -No restriction for Private Funds No DFSA prior approval required for delegation of activities. 30 Page 30

31 Recent Developments Cont. Replace single property fund prohibition with disclosure regime Reduced base capital for custodians from $10 million to $4 million Supplementary Prospectuses on annual basis unless replacement prospectus 12 month end dates for Prospectuses (where units still on offer) Replace Shari a Board conflicts prohibition with a disclosure regime. 31 Page 31

32 Thank You For further information - Telephone: (Supervision Department) 32 Page 32